Settlement in Tribune bankruptcy case collapses

The contentious Tribune Co. bankruptcy case lurched into a new state of uncertainty Friday as a settlement at the heart of the company’s proposed reorganization plan fell apart and big creditors said they would attempt to negotiate a deal without Tribune’s participation.

The developments threatened to push the 20-month-old case past the two-year mark and raised the specter that it could devolve into protracted litigation.

At a hearing in Delaware on Friday, Tribune lead attorney James Conlan said that in the wake of failed negotiations, the Chicago company would file an amended reorganization plan next week that reflects management’s own best estimate of what is a fair deal for everybody.

Tribune, which owns the Los Angeles Times, KTLA-TV Channel 5, the Chicago Tribune and other media properties, still hopes to win widespread support for a plan, Conlan said.

But he warned that if the plan couldn’t win the support of enough creditors, Tribune would launch litigation over claims central to the case that a 2007 leveraged buyout led by Chicago real estate magnate Sam Zell rendered the company insolvent.

“The debtor has tried mightily to bring the parties together” to settle the leveraged buyout claims, Conlan said. “That hasn’t happened.”

Until recently Tribune management had been at the center of settlement discussions by virtue of its exclusive right under bankruptcy law to file a reorganization plan. But in early August that right expired and other parties now have the opportunity to propose alternative plans without the approval of U.S. Bankruptcy Judge Kevin Carey.

If that happens, said Douglas Baird, a bankruptcy expert at the University of Chicago Law School, each plan would have to go through its own months-long disclosure, voting and confirmation process.

In the interest of avoiding such delays, management could still rejigger its plan to reflect an agreement hammered out among creditors. But several people close to the situation who asked not to be named because negotiations were ongoing said Tribune management was no longer a factor in those talks.

“These are discussions that the debtors are not a part of anymore,” one source said.

The original management-brokered settlement began to collapse late last month when court-appointed independent examiner Kenneth Klee filed a report evaluating claims that the Zell leveraged buyout was an example of “fraudulent conveyance,” meaning the transaction rendered the company insolvent from Day One.

That caused creditors to realign their positions based on the findings. It also emboldened new parties in the case, like litigious hedge fund Aurelius Capital Management, to boost their involvement. Aurelius has been amassing junior bonds on the open market hoping to profit from a settlement.

By Friday’s hearing, senior creditors JPMorgan Chase & Co. and Angelo, Gordon & Co., the two largest and most powerful signatories to the original settlement, had backed out of the deal and signaled that they would open new negotiations excluding Tribune management.

The degree of discord could be seen at the start of the hearing.

Shortly after Carey took the bench, lawyers for the Official Committee of Unsecured Creditors in the case and JPMorgan, until recently its biggest ally, complained that the debtor would not allow them extra time to try to complete 11th-hour negotiations before the hearing began.

“They said absolutely not!” a lawyer for JPMorgan said, “and they told the parties to run over [to the courthouse for the start of the hearing].”

Conlan didn’t dispute the account, noting that “we didn’t have to run over because we weren’t part of those settlement discussions.”

The sources close to the situation said that despite the discord and shifting alliances, there are signs that the new negotiations among creditors may hold some promise.

The most powerful holdout to the original settlement was a large group of senior creditors led by Oaktree Capital Management. The Credit Agreement Lenders, as they dubbed themselves, have argued that although they have little exposure to the leveraged buyout claims, they are being asked by JPMorgan and other parties who do have exposure to help pay the $450 million it took to appease junior creditors.

Long before Tribune lost its exclusive right to file a reorganization plan, Oaktree asked Carey for permission to file a competing plan that would largely ignore the junior claims.

Now that Oaktree is free to file a plan, it hasn’t — at least so far. The sources said that might indicate that for now it was willing to listen to other arguments.